Insights

A win for compensation committees

April 23, 2013

Management Liability/D&O

“Say on pay” has been a significant concern for corporations since the Dodd-Frank Wall Street Reform and Consumer Protection Act began requiring stockholders to hold an advisory vote on executive compensation. While the votes were intended to make executive pay packages more transparent and allow investors to voice their thoughts, they’ve become a way for shareholders to attack directors for the compensation decisions. Even though Congress never intended for the provision to take this route, it comes as no surprise that some plaintiffs have filed suit. Thankfully, the courts reaffirmed Congress’ original intent with their decision in the recent Raul v. Rynd case.

Say on pay and the litigation that has resulted from the rule 
The say on pay requirement is mandatory for publicly traded companies, but the shareholder vote isn’t binding and shouldn’t be thought of as a way for investors to overrule executive pay decisions. Rather, it’s a way for those with a stake in business interests to indicate whether or not they approve of executive performance.

Unfortunately, some have taken their interpretation of the legislation too far and see it as a way to bring a lawsuit against a company or its board. In the instance of Raul v. Rynd, the case’s plaintiff argued that during a year a company posted losses and negative investor returns, corporate compensation decisions failed to take into account shareholder votes that rejected an executive pay raise. The plaintiff alleged this decision violated the firm’s “pay for performance” mentality and the shareholder vote that disapproved of corporate pay increases should have signaled to executives the pay increases were a poor business decision.

The court dismissed the complaint, deciding the complaints were based on “flawed premises” and claiming the plaintiff had “misconstrue(d) the effect of the shareholder vote.” Executives faced no repercussions after the case was decided, as the court upheld Congress’ intentions, but the suit does serve as a strong reminder that corporations need to protect themselves with D&O insurance.

Even though the litigation proved unsuccessful, it’s likely more suits will follow and corporate boards and compensation committees will still face challenges in the future. I’ll discuss those difficulties and how risks can be mitigated in a later post. For now, let’s enjoy the victory and the knowledge that the court stayed true to the say on pay provision’s original goals.

The views expressed in this blog are solely those of the author. This blog should not be taken as insurance or legal advice for your particular situation. Questions? Comments? Concerns? Email: phuskins@woodruffsawyer.com.

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All views expressed in this article are the author’s own and do not necessarily represent the position of Woodruff-Sawyer & Co.

Priya Cherian Huskins

Senior Vice President, Management Liability

Editor, Management Liability/D&O

Priya is a recognized expert and frequent speaker on D&O liability risk and its mitigation. In addition to consulting on D&O insurance, she counsels clients on corporate governance matters, including ways to reduce their exposure to shareholder lawsuits and regulatory investigations. Priya serves on the board of an S&P 500 public company and a large private company and has an impressive list of publications, speaking engagements, and awards for her influence and expertise in the industry. 

415.402.6527

LinkedIn

Priya Cherian Huskins

Senior Vice President, Management Liability

Editor, Management Liability/D&O

Priya is a recognized expert and frequent speaker on D&O liability risk and its mitigation. In addition to consulting on D&O insurance, she counsels clients on corporate governance matters, including ways to reduce their exposure to shareholder lawsuits and regulatory investigations. Priya serves on the board of an S&P 500 public company and a large private company and has an impressive list of publications, speaking engagements, and awards for her influence and expertise in the industry. 

415.402.6527

LinkedIn